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Delaware Small Cap Core Fund Quarterly commentary June 30, 2014 Class A (DCCAX)

Within the Fund

Delaware Small Cap Core Fund (Class A shares at net asset value) posted a positive return and outperformed its benchmark, the Russell 2000® Index, in the second quarter of 2014.

Excess returns during the quarter were driven by stock selection in the energy, consumer staples, and business services sectors. Stock selection in the finance and technology sectors detracted from performance. The Fund’s underweight to utilities also detracted from relative performance.

The Fund ended the quarter with top overweights in the finance sector (where we added three new names), consumer services, and communications services. The portfolio has the largest underweights in the utilities, real estate investment trusts (REITs), and credit cyclicals sectors.

Among the top contributors to performance this quarter was technology company Synaptics. The company is engaged in developing and supplying custom-designed human interface solutions that enable people to interact more easily and intuitively with a wide variety of mobile and electronic devices. The stock gained 51% during the quarter as a result of a raise in guidance and the announced acquisition of Renesas RP Drivers (a Japanese display drive company). The acquisition is expected to be accretive to Synaptics earnings and could potentially provide future revenue synergies.

Another strong performer was long-term holding Susser Holdings which agreed to be acquired by Energy Transfer Partners at a healthy 40% premium (at the time of the announcement). We are pleased with the growth that the Texas-based convenience store and wholesale fuel distributor has provided to the portfolio over the years.

InterMune is a biotechnology company focused on the research, development, and commercialization of innovative therapies in pulmonology and fibrotic diseases. The company continued its strong performance in the second quarter, gaining 32%, as investors continued to react positively to the success of its pivotal U.S. Phase 3 trial for Esbriet, a treatment for idiopathic pulmonary fibrosis (IPF), a progressive and fatal lung disease. We continue to own the stock as we see further upside potential from a successful commercial launch of Esbriet next year.

Detractors from performance during the quarter included Rocket Fuel, a digital advertising company that provides solutions for the management and evaluation of advertising campaigns. The stock declined 27% during the quarter amid concerns about slowing revenue growth. We continue to hold the stock as we believe these fears are overblown and the stock’s valuation remains attractive to us.

In the healthcare sector, Auxilium Pharmaceuticals is a specialty pharmaceutical company focused on the development and commercialization of therapeutics for urology and sexual health. Auxilium performed poorly during the second quarter, declining 26% — the company pre-announced lower revenue guidance on the back of significantly lowered sales expectations for Testim, its topical testosterone replacement therapy gel for hypogonadism (or low testosterone). We continue to own the stock as we think expectations are too pessimistic at current price levels, and see meaningful upside from both the company’s suite of existing products and its new drug pipeline.

KEYW Holding offers cyber security solutions to the defense, intelligence, and national security agencies, as well as commercial enterprises. After appreciating 39% during the first quarter of 2014, the stock gave back some of those gains, falling 33% in the second quarter. The decline was a result of concerns regarding the growth potential in the company’s recently launched commercial business. We remain confident in the company’s strategy and continue to hold the stock.

Outlook

Looking forward, we believe small-cap stocks could continue to benefit from many of the conditions that contributed to growth in 2013. Inflation remains low, the Federal Reserve remains accommodative, and consumer confidence continues to expand. While we were concerned with the weak economic data from earlier in the year, recent reports have indicated that many of these figures are rebounding positively.

We continue to keep a close eye on economic indicators, as we believe improving conditions in the U.S. could provide further tailwinds to small-cap equities. We have begun to see an increase in mergers-and-acquisitions activity this year, and we believe this trend should continue given the healthy levels of cash on corporate balance sheets and favorable credit market conditions.

We believe that falling correlations in the market provide a positive backdrop for the Fund. Our research continues to favor companies with what we view as strong balance sheets and cash flow, sustainable competitive advantages, and high-quality management teams, which we believe have the potential to outperform over the cycle.

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The views expressed represent the Manager's assessment of the Fund and market environment as of the date indicated, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Information is as of the date indicated and subject to change.

Document must be used in its entirety.

Performance

The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.

Performance data current to the most recent month end may be obtained by calling 800 523-1918 or visiting delawareinvestments.com/performance.

Total returns may reflect waivers and/or expense reimbursements by the manager and/or distributor for some or all of the periods shown. Performance would have been lower without such waivers and reimbursements.

Average annual total return as of quarter-end (06/30/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)3.30%4.74%29.16%16.51%21.69%9.43%11.31%12/29/1998
Class A (at offer)-2.63%-1.26%21.70%14.22%20.26%8.78%10.88%
Institutional Class shares3.37%4.84%29.53%16.78%22.00%9.67%11.47%12/29/1998
Russell 2000 Index2.05%3.19%23.64%14.57%20.21%8.70%n/a

Returns for less than one year are not annualized.

Class A shares have a maximum up-front sales charge of 5.75% and are subject to an annual distribution fee.

Prior to Aug. 1, 2005, the Fund had not engaged in a broad distribution effort of its shares and had been subject to limited redemption requests. 12b-1 fees were waived for this period. Had 12b-1 fees been applied, performance would have been lower. Expense waivers were in effect for the periods shown. Performance would have been lower if waivers did not apply.

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

Russell 2000® Index (view)

Expense ratio
Class A (Gross)1.31%
Class A (Net)1.31%
Institutional Class shares (Gross)1.06%
Institutional Class shares (Net)1.06%
Top 10 holdings as of 07/31/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
G-III Apparel Group Ltd.1.3%
Tenneco Inc.1.2%
Jack in the Box Inc.1.2%
InterMune Inc.1.1%
ICON PLC1.1%
West Pharmaceutical Services Inc.1.1%
Carrizo Oil & Gas Inc.1.0%
Steven Madden Ltd.1.0%
Casey's General Stores Inc.1.0%
Proofpoint Inc.1.0%
Total % Portfolio in Top 10 holdings11.0%

Institutional Class shares are only available to certain investors. See the prospectus for more information. 

All third-party marks cited are the property of their respective owners.

Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund’s prospectus and its summary prospectus, which may be obtained by clicking the prospectus link located in the right-hand sidebar or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.

Investing involves risk, including the possible loss of principal.

Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors.

Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.

REIT investments are subject to many of the risks associated with direct real estate ownership, including changes in economic conditions, credit risk, and interest rate fluctuations.

International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

Not FDIC Insured | No Bank Guarantee | May Lose Value